Investors return to carry trades

THERE’S life in the great emerging-market carry trade yet, although now it comes with a twist.

Investors are betting a trade that reaped returns of more than 20 percent last year for borrowing dollars to buy Brazil’s real, Russia’s rouble and South Africa’s rand has further to run – only they are using the battered British pound to fund long positions in emerging-market currencies. Citigroup on Monday named shorting the pound against the Russian rouble its top trade of the week.

The so-called carry trade, in which investors borrow in countries with low rates to invest in higher-yielding assets, lost some of its appeal late last year as rising US borrowing costs bolstered the greenback and Donald Trump’s election dampened appetite for risk.

Now the pound’s volatility, sparked by the UK’s move to pull out of the single European market, is making developing markets look like a relatively safe bet.

“Sterling is as volatile as any emerging-market currency at the moment,” said Ben Kumar, the London-based investment manager at Seven Investment Management. “The currency risk is much easier to take than emerging-market currencies versus the dollar.”

The pound’s wild swings have closely tracked every new piece of information on the British government’s Brexit plans.

The currency plunged more than 1 percent on Monday, then surged more than 3 percent on Tuesday after Prime Minister Theresa May said UK legislators would get a vote on the final deal for the nation’s exit from the EU.

The pound weakened 0.8 percent to 1.2313 dollars by 10.30am in London, taking its decline in the past 12 months to 13.4 percent. A measure of the pound’s price swings against the dollar in the past week climbed to 23.7 percent yesterday, the most after Turkey’s lira among 16 major developednation and emerging-market currencies. – Bloomberg